This is not a heavily hyped stock sent out in lots of ads — I should make that clear up front.
But it’s a puzzle, and I like to solve puzzles… so I thought I’d sniff it out for you.
The tease was part of a Stansberry letter that seems to have gone just to their existing subscribers in the Stansberry Digest, which I think is the basic daily letter that goes to everyone who pays for any Stansberry subscription. I don’t get this letter, but several readers forwarded it along.
Porter Stansberry introduces his idea as follows:
“It’s an idea I call the ‘magic’ portfolio because it combines buying the highest-quality businesses with extremely stable stocks. When used to build whole portfolios, this combination produces market-beating results with about half the volatility of the stock market as a whole.”
There are lots of ideas that are pitched as “Magic” ideas or strategies or strategies that beat the market, of course, so you’d be forgiven for running and hiding when you hear the “M” word… but this one is, at least, based on rational analysis — here’s more from the Digest that some readers forwarded to me:
“last April I introduced the idea of trying to build a “magic” portfolio. I knew from my experience recommending chocolate maker Hershey (HSY) back in December 2007 (right before the worst bear market of our lifetimes) that certain stocks can produce outstanding long-term results with shockingly little volatility.
“These ‘magic’ stocks tend to have similar characteristics: They produce good profits (a 15%-plus operating margin). They are far less volatile than the S&P 500 (their “beta” is 20% lower than the market’s, meaning their moves up and down are less severe). And they own well-known brands. To produce good investment results, it’s also important to buy them at a reasonable price. We consider great companies trading for less than 12 years’ worth of cash profits to be ‘reasonably priced.’
“None of these ideas is revolutionary. We’ve just put hard numbers behind the kinds of businesses every investor should want to buy: Highly profitable, well-known (more than $1 billion in market cap), reliable, and fairly priced.”
He says that they’ve been backtesting these strategies and screens using data from the past 15 years, and that you end up with a portfolio that beats the market by a bit, but with much less volatility. “Volatility” isn’t risk, really, but investors think of it that way — it’s a measure of how much a stock moves relative to the market, so it tells you whether the stock jumps up and down more than the market, with greater amplitude in that price chart, or whether it is more stable than the market.
“Less stable” equals “more risky” in the Wall Street consensus definition (others think about risk differently — you’ll often see value investors note that the risk that matters is the likelihood/probability of a permanent loss of capital, which is a definition that makes more sense to me… but high volatility certainly makes investors feel like their stocks are “risky”). And there’s something to be said for stable stocks, for sure.
He goes on to explain some more about this “magic” stock strategy, which over three year periods would have beaten the market most of the time (well over half the time), with substantially less volatility even though the 15 year period includes two pretty cataclysmic market crashes, and then to say that he thinks the “magic” performance can be improved by doing two things: Only choosing those stocks that meet the numerical criteria and that have strong brands…
“We started with ‘magic’ stocks – again, companies with great businesses, low volatility, and reasonable valuations. Then we eliminated about 80% of the